The Minimum Wage: To Raise Or Not To Raise?

There is an increasing debate about minimum wage being raised due to cost-of-living and quality of life. Is this a good idea (with small businesses in mind)? Way the good and the bad. In this article from Forbes, we explore the issues and benefits from minimum wage being increased.

The majority of those earning minimum wage are young workers in the early stage of their work life. After all, the minimum wage was never intended to be a career salary, but rather a stepping stone to bigger and better things. Perhaps this is where the confusion lies. One tenet of a capitalistic society is that it provides a ladder for individuals who wish to improve their economic standing. And for those who are motivated and able to do so, there is ample room in the upper-middle and upper class of the income spectrum. Although this protest had the appearance of millions of workers fighting for their careers, if they truly understood the principle behind the minimum wage, they might choose to spend their time improving themselves rather than protesting about something which was never intended to be a long-term situation.

Every Action Has an Opposite reaction

Many times the best laid plans don’t work out as planned. In the case of the minimum wage restaurant worker/protestor, it’s quite possible that the result will be far from what they envisioned. Consider this. According to a 2010 study from the National Restaurant Association and Deloitte& Touche LLP, profit margins for full-service restaurants ranged from a low of 1.8% to as much as 3.5%. What could happen if government were to mandate a higher minimum wage for these businesses? The outcome would depend on several variables, including the amount of the raise, the existing profit margin of the restaurant, the willingness of the customer to pay a higher price, and other factors. To explore this further, let’s see where we can agree. First, I think all would agree that a business must be profitable to remain in business. After all, no one starts a business with the intent of losing money.Next, I think we can agree that it’s very difficult for a family with children to make ends meet earning the minimum wage. Finally, I believe we can agree that there is a limit to the amount a consumer would be willing to pay for a particular product or service. Where does that leave us? If the minimum wage is raised, businesses will be forced to react.

Profits Are Vital

Let’s begin with the first and most important point mentioned above. A business must generate a profit. If a company fails to earn a profit, it will cease to exist and everything else will be moot. When a business’s profit margin comes under pressure it is forced to either increase prices or reduce expenses. Raising prices could pose a problem because, as prices rise, at some point, demand will soften. This is known as price elasticity which means that as prices rise, the number of units sold will decrease.

Another option is cutting expenses. This may involve reducing staff, eliminating certain benefits, reducing the hours of operation, etc. To learn more, I spoke with a local small business owner who owns a number of fast-food restaurants. He stated that his first response to a minimum wage hike would be to raise prices. However, if sales decline because customers are unwilling to pay the higher price and he needed to cut expenses, there would be very little he could cut. What would a restaurant do if government mandates a higher minimum wage? To explore this, let’s discuss an experience I had last year.

Would You Like Fries With That?

In July 2014, I was in an airport restaurant in Minneapolis. The very first thing I noticed was a kiosk at every table. I realized the kiosks had replaced most of the servers. There were still a few individuals around to serve drinks and deliver the food, but the majority of the servers were gone. Is this a coming trend? Thus far, Olive Gardenrestaurants plan to have a touch pad ordering system in all 800 locations by the end of 2015. You’ll also find this technology in Chili’s, and Red Robin is in the process of a nationwide rollout. Hardee’s is planning a 30 unit test roll out as are a number of others. And that’s just the food industry. Yes, this is a trend with great momentum. How prevalent could this become?

Using McDonald’s as an example, a kiosk could replace every person on the front line, those who take the customer’s order. Workers would still be needed to prepare the food and keep the place clean, but many workers could be replaced. How cost effective is the kiosk? According to the business owner I mentioned earlier, he considered buying kiosks about eight years ago. The cost of one kiosk at that time was about $3,200. The software to run it was an additional $800, for a total capital outlay of $4,000. How long would it take to recoup the cost of one kiosk? To answer this, we need to make a few assumptions. If the restaurant is open from 6 AM to midnight (18 hours) and the workers earn the current minimum wage of $7.25 per hour (i.e. in Louisiana), it would take slightly over 30 days to recoup the entire cost of the kiosk. Over the following 12 months, the business would save about $47,502 in wages alone. Multiply this by six, and the savings become significant. There’s another benefit. The business would not have to deal with things such as backtalk, tardiness, and other negative employee issues.

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